ECONOMISTS have long recognised the arguments for imposing special taxes on goods and services whose prices do not reflect the true social cost of their consumption. Such taxes are known as “Pigouvian” after Arthur Pigou, a 20th-century English economist. Environmental taxes are an obvious example. There is also a Pigouvian case for duties on cigarettes, alcohol and gambling. Smoking increases the risk of cancer for those in the vicinity of the smoker; alcohol abuse and gambling are strongly associated with violence and family breakdown. Moreover, all three habits lead to higher medical costs. In theory governments can make up these costs, or “externalities”, with a tax that adjusts the prices people pay to puff, booze or punt. Such a tax might also encourage consumers to live healthier lives.

Support for another such tax, on junk food, is now spreading, especially in America. Congress is considering a tax on sugary drinks to help pay for the planned expansion of health-care coverage. Some analysts would like to see broader duties on junk food. On July 27th the Urban Institute, a think-tank in Washington, DC, proposed a 10% tax on “fattening food of little nutritional value” that, it claimed, would raise $500 billion over ten years.

The logic for a tax on fattening food may seem obvious. About one-third of Americans are obese, up from 15% in 1980. Fat people are more prone to heart disease, diabetes, bone disorders and cancer. An obese person’s annual medical costs are more than $700 greater than those of a comparable thin person. The total medical costs of obesity surpass $200 billion a year in America, which is higher than the bill for smoking. These costs are not all borne by the obese. When health-care costs are shared, obesity becomes a burden for everyone. Thanks to government health-care plans such as Medicare half of America’s obesity-related health costs land on taxpayers. In private employer-sponsored health plans the slim pay similar premiums to the overweight.

Though teachers protested the action, the district claims it will be able to save nine teaching positions as a result. The decision to privatize janitorial services is part of an effort to cover a $2.2 million deficit.

. . . Superintendent Tom TenBrink said he sees the move as the only option that does not hurt programs and teachers.

Projections show the district will face another $2.6 million shortfall next year, and savings are quickly being depleted.

"We can no longer afford every employee. It's just not feasible," TenBrink said. "This is a sad day in our history and it's probably the hardest thing I've had to do. I quite honestly don't know where else to go. I don't know where to turn."

Earlier this spring, the tiny Principality of Liechtenstein pledged greater tax openness, under growing pressure from the member nations of the G-20. Nestled between the eastern edge of Switzerland and the westernmost tip of Austria, the tiny principality of just 35,000 inhabitants has long served as an international tax haven--much like its European neighbors Switzerland and Luxembourg. Yet Liechtenstein now pledges to follow OECD financial reporting standards, and the G-20 and the EU both hope that Switzerland and Luxembourg will follow suit.

. . . the French newspaper La Tribune reported that the Organization for Economic Cooperation and Development had added Switzerland, Luxembourg, Austria, Singapore and Hong Kong to a list of uncooperative tax havens, which already includes the well-established havens of Liechtenstein, Andorra and Monaco. . . .

Banking secrecy was enshrined in law in Switzerland in the 1930s. . . .

“Switzerland is the big prize,” Willem Buiter, a professor at the London School of Economics and Political Science, wrote on his blog last year, because “unlike the other tax havens, it is a country rather than a dwarf-state and postage-stamp curiosity, and it is outside the E.U.,” therefore out of reach of European Union enforcers.

Wednesday, July 29, 2009

One of the world's most influential economists warns today that Britain faces the prospect of two recessions in quick succession.

Robert Shiller, Professor of Economics at Yale University, said that the recent stock market bounce should be treated with caution.

He likened the current sense of optimism to a marital row. “You don't know whether the argument with your wife is really over or not. Is the problem something that your spouse will bring up again, and again?”

Tuesday, July 28, 2009

GIVE up lamb roasts and save the planet. Government advisers are developing menus to combat climate change by cutting out “high carbon” food such as meat from sheep, whose burping poses a serious threat to the environment.

Out will go kebabs, greenhouse tomatoes and alcohol. Instead, diners will be encouraged to consume more potatoes and seasonal vegetables, as well as pork and chicken, which generate fewer carbon emissions.

“Changing our lifestyles, including our diets, is going to be one of the crucial elements in cutting carbon emissions,” said David Kennedy, chief executive of the Committee on Climate Change. . . .

The problem is because sheep burp so much methane, a potent greenhouse gas. Cows are only slightly better behaved. . . .

States that allow debt collectors to seize consumers' wages have sharply higher bankruptcy rates than neighboring states that prohibit or strictly limit the practice, an Associated Press analysis has found.

This link highlights a dilemma for credit-card companies and other debt chasers: By going after wages — an increasingly popular maneuver since the recession began, lawyers say — they risk pushing consumers into bankruptcy court, where judges can reduce or wipe away all sorts of financial obligations.

The apparent relationship between so-called garnishment laws and states' bankruptcy rates also bolsters the arguments of consumer advocates, who have long said that intercepting someone's wages to pay their debts only increases their financial vulnerability.

After gathering millions of bankruptcy records from 2006 until now, the AP plotted the number of filings for each U.S. county in its Economic Stress Map — a geographic, chronological and visual depiction of economic misery based on unemployment, foreclosure and bankruptcy data.

While bankruptcy rates vary for many reasons, the five states that prohibit or strongly limit wage seizures — North Carolina, Pennsylvania, South Carolina, Florida and Texas — all have drastically lower rates than their neighbors, with particularly striking differences along borders, where economic conditions are similar but bankruptcy rates are not. . . .

Thursday, July 23, 2009

"The Straight Dope" covered the history of 99-cent pricing several years ago. It's not really my specific area of expertise in economics, so I'll defer to Mr Adams:

Dear Cecil:

Why do prices end in .99? My father says it started at Bill's Texaco in Waco, Texas during a price war. I say it's a much older management technique to force employees to open cash register drawers for each transaction (making simply pocketing a bill more obvious). Since we're both inveterate bullshitters we've decided to leave it to you.

— Richard H., San Francisco

Dear Richard:

The topic does lend itself to wielders of the big shovel, no question about it. The most elaborate explanation I've seen is in Scot Morris's Book of Strange Facts & Useless Information (1979):

"In 1876, Melville E. Stone decided that what Chicago needed was a penny newspaper to compete with the nickel papers then on the stands. But there was a problem: with no sales tax, and with most goods priced for convenience at even-dollar figures, there weren't many pennies in general circulation. Stone understood the consumer mind, however, and convinced several Chicago merchants to drop their prices--slightly. Impulse buyers, he explained, would more readily purchase a $3.00 item if it cost "only" $2.99. . . .

The public gets a chance next week to comment on a plan to build a futuristic high-speed rail system along Michigan's interstates, allowing people and cars to travel from Grand Rapids to Detroit in less than an hour.

The Michigan-meets-"The Jetsons" concept is being studied by a bipartisan state panel holding meetings around the state in an attempt to gauge public support. . . .

The project was proposed by the privately owned Interstate Traveler Company, located just north of Ann Arbor. Company officials are asking the state to provide free use of the right-of-way along Michigan's interstate freeway system.

The railway's cars would levitate on top of an elevated hydrogen-based track and be propelled by energy from magnets. Cars holding people, freight and vehicles would cycle at high speeds, stopping in Grand Rapids, Lansing, Ann Arbor and Detroit. . . .

It is, however, an expensive proposition.

The project is estimated to cost more than $2 billion, or about $17 million a mile.

. . . the company is not asking for any state, federal or local funding.

Company founder Justin Sutton has told state officials he has secured private investors for the project, but needs lawmakers to agree to give him free use of the interstate right-of-way in exchange for revenues that will be shared with the state and local governments after three years of operation.

The bill would also contribute an additional $1.5 billion to Amtrak. Though Amtrak has been working toward independent solvency for decades, it has always had to rely upon funding from the federal government to continue operations.

What you may not know, however, is that states often chip in on the subsidies to keep in-state Amtrak lines in operation. Here in Michigan, where our budget woes have corresponded to the poor state economy, we spend $7.3 million of Michiganders' money to keep open our lines that run to Chicago.

And B. Candace Beeke, writing for the Business Review Western Michigan's blog "West Side Story," thinks that's too much money to spend on the few of us (that's right, I do ride the Pere Marquette line from Holland to Chicago) who take the train, especially in these difficult times:

In normal times, one could argue that the $7.3 million the state spends to subsidize two Amtrak rail lines to Chicago is simply the cost of supporting public transportation.

And it just might be a valid argument, if Amtrak could show great value for the money it receives from the taxpayers of Michigan.

We don't argue with the notion that having train service to Chicago is a nice thing. But is it truly a need that requires a public subsidy?

Our issue here is twofold: Is the $7.3 million now spent on Amtrak the best use of dwindling financial resources for a state mired in a persistent fiscal crisis; and who is using the train to Chicago?

Is there a high public good being accomplished through the Amtrak subsidy? Or are we merely providing folks who want to go shopping on the Miracle Mile a taxpayer handout to help pay their way to the Windy City and back?

That's why -- at least from the perspective of triggering a much-needed conversation -- we welcome the efforts of some lawmakers in Lansing who want to trim Amtrak's subsidies. . . .

This video segment (below) recently aired on PBS's NewsHour. It summarizes Russia's current economic misfortunes. Owing largely to falling energy prices and a lack of diversification, the heady days of the Putin prosperity seem to have ended as the nation experiences record high inflation and unemployment rates. Is government reform the answer?

Here are a few quotes you will hear in the video:

"We used to work two or three shifts and on Saturdays, also. Now we work only two to four days a week. My job pays only half as much as it used to. But when you're older than 50, it's hard to get a new job." - Alexei Koverigina, Russian worker

"That's just an issue of the diversifying the Russian economy, which should not rely only upon the gas, oil and metals. It should be modern type of economy based on the unique human capital which we have in the country." - Anatoly Chubais, CEO, Russian Corporation of Nanotechnologies

"Current government simply thinks that sooner or later those smart guys in U.S. and Western Europe will do something with the whole situation in the world and oil prices will come back on the same levels. And this government will continue to do nothing, not pursuing any single reform." - Mikhail Kasyanov, Former Prime Minister

Tuesday, July 21, 2009

Economists have long been interested in the phenomenon of 99-cent pricing: prices that are given so that they end in .99, rather than at the next whole dollar amount. For example, in many contexts it is much more likely that you will see an item selling for $3.99 rather than an even $4.00.

Economists are curious about this real-world phenomenon since the idea that the psychology of a price starting with "3" instead of "4" makes a difference flies in the face of the fairly standard rationality assumptions made on the part of consumers. That is, consumers aren't stupid, so they should recognize immediately that the difference between $3.99 and $4.00 is precisely one cent--the same as the difference between $4.00 and $4.01.

There is a fairly rich, expanding literature on 99-cent pricing. For example, in a 1997 paper appearing in Economics Letters, Kaushik Basu explains the phenomenon without abandoning the assumption of rationality on the part of consumers.

As the PBS NewsHour video (below) illustrates, recent dramatic drops in the price of milk have left many of the nation's farmers hurting--so much so that their cows are becoming more valuable as beef than as part of their dairy stock. So dairy farmers are struggling, and selling off much of their herds for slaughter. And some are getting out of the business altogether.

As a result, many dairy farmers are seeking government relief. Yet America's dairy farmers have been the beneficiaries of the Dairy Price Support Program since 1949. The USDA-administered program has maintained a guaranteed minimum price for milk for dairy farmers by buying up surplus butter, nonfat dry milk, and cheese.

But like any other price floor, dairy price supports have social costs to all of us--in the form of (1) higher prices for milk and milk-related goods, and (2) higher tax bills required to generate the tax revenues required to buy up the surpluses from farmers--that are most likely greater than the benefits that dairy farmers reap as a result. Even the president's own Office of Management & Budget has rated the program as "Not Performing."

In addition, in an effort to help with fluctuations in the market price of milk, the USDA supports the Milk Income Loss Contract (MILC) program. The program makes payments to dairy farmers in times such as these; that is, the programs makes payments to dairy farmers in order to insulate them from fluctuations in the market price of milk. Low milk prices means more money gets paid to farmers.

The two programs are expensive ones. According to the Herkimer Telegram, "The USDA is expected to spend nearly $1 billion in fiscal year 2009 on purchases of dairy products (Dairy Product Price Support Program) and payments to producers (MILC)." And that doesn't even include the higher prices you and I pay as a result of the program.

Nevertheless, facing some of the lowest market prices in three decades, dairy farmers are seeking extended price support benefits. And it should come as no surprise that the lawmakers spearheading the effort hail from key dairy states: In a recent letter to the U.S. Secretary of Agriculture, Wisconsin senators Herb Kohl and Russ Feingold, as well as Patrick Leahy of Vermont, among others, urged temporary increases in the dairy price support program. You can read the full text of the letter here.

Yet according to a spokesman for the International Dairy Foods Association (IDFA), a trade group representing Dean Foods and other producers, the support programs hurt dairy companies over the long term since they reduce incentives for producers to expand and innovate. Paul Kruse, head of Texas-based Blue Bell Creameries and spokesman for IDFA, gave testimony last week before a congressional committee, arguing that such programs distort markets, leaving consumers paying more than they need to for milk and other dairy products.

IN 1978 Michael Jensen, an American economist, boldly declared that “there is no other proposition in economics which has more solid empirical evidence supporting it than the efficient-markets hypothesis” (EMH). That was quite a claim. The theory’s origins went back to the beginning of the century, but it had come to prominence only a decade or so before. Eugene Fama, of the University of Chicago, defined its essence: that the price of a financial asset reflects all available information that is relevant to its value.

From that idea powerful conclusions were drawn, not least on Wall Street. If the EMH held, then markets would price financial assets broadly correctly. Deviations from equilibrium values could not last for long. If the price of a share, say, was too low, well-informed investors would buy it and make a killing. If it looked too dear, they could sell or short it and make money that way. It also followed that bubbles could not form—or, at any rate, could not last: some wise investor would spot them and pop them. And trying to beat the market was a fool’s errand for almost everyone. If the information was out there, it was already in the price. . . .

That is why many people view the financial crisis that began in 2007 as a devastating blow to the credibility not only of banks but also of the entire academic discipline of financial economics. . . .

Saturday, July 18, 2009

In Free: The Future of a Radical Price, reviewed in the July 16 issue of the Economist, Wired editor and former Economist writer Chris Anderson probes whether technology and productivity gains have made it possible for goods and services to now be free.

It's an interesting question, especially in light of modern technological advances. For example, one might reasonably wonder why Amazon doesn't simply give away its Kindle or Kindle DX, earning its money through sales of downloadable content.

Similar questions arise in a competitive context. The standard competitive economic model predicts that in the market equilibrium the price of a good will equal the marginal cost of the last unit produced and sold. Yet for goods such as software that has already been written, and is also available for download online, the marginal opportunity cost to the firm of making one more download available is awfully close to zero (especially if server space and bandwidth are sunk costs). Which implies that the market price should also be near zero.

Read the Economist's full review of Chris Anderson's Free. And best of all, you may read Free -- the entire book -- absolutely free (below). Enjoy!

In an earlier post today I noted the Economist's July 16 two-article feature on the shortcomings of economics and economists.

The first of the feature's two articles discusses disagreement and dissent among macroeconomists. Now there has always been disagreement and dissent among macroeconomists. That's why there are multiple schools of macroeconomic thought. In fact, that is what makes a macroeconomics class especially rich--albeit a bit more challenging as well. Students must learn how each school sees the macroeconomic world working, then be able to make policy recommendations consistent with each school's beliefs in response to various economic scenarios.

So the differences have always been there. But recent economic developments (i.e., the "global economic crisis") have highlighted and sharpened these differences, and for the first time economists' skirmishes are being waged right in front of the American public.

ROBERT LUCAS, one of the greatest macroeconomists of his generation, and his followers are “making ancient and basic analytical errors all over the place”. Harvard’s Robert Barro, another towering figure in the discipline, is “making truly boneheaded arguments”. The past 30 years of macroeconomics training at American and British universities were a “costly waste of time”.

To the uninitiated, economics has always been a dismal science. But all these attacks come from within the guild: from Brad DeLong of the University of California, Berkeley; Paul Krugman of Princeton and the New York Times; and Willem Buiter of the London School of Economics (LSE), respectively. The macroeconomic crisis of the past two years is also provoking a crisis of confidence in macroeconomics. In the last of his Lionel Robbins lectures at the LSE on June 10th, Mr Krugman feared that most macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst”.

These internal critics argue that economists missed the origins of the crisis; failed to appreciate its worst symptoms; and cannot now agree about the cure. In other words, economists misread the economy on the way up, misread it on the way down and now mistake the right way out. . . .

Well, the debate continues in the new issue of the Economist. This lead piece gives an overview of what follows in the two-article feature. Here's an excerpt:

OF ALL the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself. A few years ago, the dismal science was being acclaimed as a way of explaining ever more forms of human behaviour, from drug-dealing to sumo-wrestling. Wall Street ransacked the best universities for game theorists and options modellers. And on the public stage, economists were seen as far more trustworthy than politicians. John McCain joked that Alan Greenspan, then chairman of the Federal Reserve, was so indispensable that if he died, the president should “prop him up and put a pair of dark glasses on him.”

In the wake of the biggest economic calamity in 80 years that reputation has taken a beating. In the public mind an arrogant profession has been humbled . . . .

Friday, July 17, 2009

Apparently US Secretary of State Hillary Clinton and Undersecretary Patrick Kennedy misunderstand the concept of a free lunch. Seems the good people who work in the State Department would like the option of using Firefox as their browser.

Now Firefox is a free, open-source web browser. Yet at a recent State Department "town hall meeting," Clinton and Kennedy defended the exclusive use of Internet Explorer, citing "expense questions" associated with Firefox. Watch Kennedy get shouted down and dance around the issue--and apologies for the attitude of the accompanying piece at the Gizmodo site.

And if you are prepared to risk "expense questions" of your own, download Firefox:(Hat-tip: Ruth Arevalo)

Questions keep coming in about the likelihood and consequences of a California default on its bonds. One unexpected result might be anger for the ages. Here's poet William Wordsworth on the 1842 bond default of Pennsylvania, which still hadn't paid off bondholders (like Wordsworth, presumably) when he wrote "To the Pennsylvanians" ("Sonnet from a Surly Creditor," perhaps?) in 1845.

The state borrowed money for infrastructure, BTW, mainly canals. It defaulted because it refused to raise property taxes. As was famously said about history repeating itself: First as tragedy; the second time, as farce.

To the Pennsylvaniansby William Wordsworth

Days undefiled by luxury or sloth,Firm self-denial, manners grave and staid,Rights equal, laws with cheerfulness obeyed,Words that require no sanction from an oath,And simple honesty a common growth--This high repute, with bounteous Nature's aid,Won confidence, now ruthlessly betrayedAt will, your power the measure of your troth!--All who revere the memory of PennGrieve for the land on whose wild woods his nameWas fondly grafted with a virtuous aim,Renounced, abandoned by degenerate MenFor state-dishonour black as ever cameTo upper air from Mammon's loathsome den.

Wednesday, July 15, 2009

(CNN) -- Speculation in South Korean media that Kim Jong-Il may have cancer is the latest development in a busy month for North Korea watchers.

The U.S. Navy tailed a North Korean ship that was believed to have been carrying weapons bound for Myanmar. Diplomats bemoaned the state's reluctance to return to the negotiating table even as the regime in Pyongyang celebrated American Independence Day by lobbing seven short-range missiles into the Sea of Japan.
But a worldwide network of amateur sleuths has been watching a different trend emerge in the Stalinist state: Capitalism.

This grassroots group of North Korean observers has watched the growth of village markets via satellite photos courtesy of Google Earth. They compare notes and analyze photography on North Korean Economy Watch.

"There's a whole bunch of small-scale private enterprises that have sprung up," said Curtis Melvin, founder of the site and an economist at George Mason University where he's working toward his doctorate degree. "With Google Earth, you can scroll back through time from the most recent satellite photographs and see how these markets are growing.

"In large towns you can see multiple markets, but you can find them in every town and every city" . . . .